ABDULLAH: Several years ago, we (INCEIF) formed a committee which looked at old products, or existing products, in order to try and stimulate things which could be applied in the modern era. You had a particular product which you've mentioned, which came from the late 18th century from the Ottoman Empire. Would you like to give us just a little brief bit of background as to why you thought this product ought to be reborn, and how we approach that rebirth?

CIZAKCA: The reason why I thought this historical instrument will be relevant today is because this instrument, called esham, was used by the Ottoman government to borrow a massive amount of money from the public and rapidly; in a relatively short time.

The instrument proved so potent, so effective, that the Ottoman government was able to raise, within the ten years of its establishment, more money by borrowing from the public than the previous financial system, called malikane, had been able to do in 90 years. So we are talking about a very potent financial instrument of public borrowing.

ABDULLAH: Why was this product so potent?

CIZAKCA: The reason why the instrument itself was so potent was because people needed this instrument. It was not because they were crazy about lending to the government, but because they had advantages; the people were interested in making these transactions.

ABDULLAH: Murat, I'd like you to explain very briefly, in words of one syllable for the layman in the audience, about the modus operandi of the product, esham, and why it appealed so greatly to the population of the Ottoman Empire.

CIZAKCA: Let's assume that, say, I am the Ottoman government, and you are a member of the public, an investor. The way it worked was like this, the Ottoman government had an asset, which was, by the way, the tobacco tax farm of the city of Istanbul. Turks being great smokers, this was a great revenue-yielding asset. The asset was yielding about one million Gurush a year; Gurush was the currency of that time. They allocated 400,000 Gurush of this asset aside for this purpose and securitized it, meaning that they divided it into equal shares and simply sold it to the public.

You as an investor bought this instrument because it yielded you a fixed return on an annual basis. On my part, the State, and this is what makes esham unique, was not obliged to return the principal back to you or I would return it when it suited me. So, because of these very strange and unusual characteristics, the instrument was not a usurious instrument from an Islamic perspective, so Muslims could purchase this instrument.

ABDULLAH: I want you to turn now to the modern day and age where, in Islamic finance, if you are looking at capital markets and the raising of funds in the marketplace, an instrument which has become not only popular but widely accepted by both the conventional community, non-Muslims and Muslims, is sukuk, the Islamic equivalent of a bond; although it does behave somewhat differently from a bond. But the marketplace sees it as a bond.

CIZAKCA: First of all, the esham is different than a sukuk because sukuk is a much more complicated instrument. Now, every sukuk has an SPV in it; SPV is Special Purpose Vehicle and there are a number of, I have counted once, there are about ten different transactions within a sukuk system.

ABDULLAH: Why would esham appeal more to the public than a sukuk would?

CIZAKCA: First of all, the esham is a simpler instrument and because of its relative simplicity, it is also a lower transaction cost instrument. The costs are lower and it is different than a bond because in a bond, the borrower has to return what he has borrowed plus the interest at a certain time.

ABDULLAH: So there's a differentiation here, that esham pays a dividend stream. If you compare that with a bond, then there's a dividend stream which is usually interest on some form of investment. But the main difference between esham and a bond is that for the bond, the principal has to be repaid at a certain time, and the esham doesn't.

From a Shariah standpoint then, sukuk is similar. The income stream needs to be Shariah compliant; in other words, it has to come from a real underlying asset and hence sometimes the complexities of many different SPVs, Special Purpose Vehicles set up. But still, a sukuk is not in perpetuity. The principal has to be repaid at some point which is certain in time as well. So that's the fundamental difference.

CIZAKCA: Yes, whereas with esham, the redemption is entirely at the discretion of the borrower.